Tenant covenants: why who is paying the rent matters most
Covenant strength is the financial standing of the tenant, meaning their ability to keep paying the rent for the term of the lease. It matters more than any other single factor in commercial property, because the income and much of the value depend on it. A long lease from a weak tenant is worth a good deal less than a shorter lease from a strong one.
Last reviewed September 2026.
What "covenant" means here
In property, the covenant is the tenant's promise to pay, and covenant strength is how good that promise is.
A lease is a contract, and its value to the owner depends entirely on whether the other side can perform. A twenty-year lease from a company that fails in year three delivered three years of rent, not twenty.
How covenant strength is assessed
Filed accounts. Turnover, profit, net assets, and the direction of travel over several years. A business with thin margins and falling sales is a different proposition from one with a strong balance sheet, whatever the lease says.
Credit ratings and scores. Agencies publish assessments and suggested credit limits. Useful as a starting point, not a substitute for reading the accounts.
Who exactly is the tenant? This catches people out. A well-known brand may trade through a subsidiary with very few assets. The name over the door is not necessarily the company on the lease. Check which entity is contracting and what stands behind it. We look at this on every letting, and it has changed our view of a tenant more than once.
Sector conditions. Some sectors face structural pressure. A tenant can be well run and still be in a shrinking industry.
Trading at that particular unit. A shop that trades well is far more likely to renew than one that does not, whatever the group accounts say.
Security beyond the tenant
Where the covenant is not strong enough on its own, several arrangements can improve the position.
A parent company guarantee, where a stronger group company guarantees the obligations. Only as good as the guarantor.
A rent deposit, commonly three to twelve months' rent held against default. Useful, and finite.
A personal or third-party guarantee, common with smaller businesses.
An authorised guarantee agreement, where an outgoing tenant guarantees the performance of the incoming one when a lease is assigned.
Why long leases from weak tenants disappoint
A long lease looks like security, and it is priced as security, which is exactly the problem: you pay for certainty you may not receive.
Take two buildings at the same rent. One has fifteen years left to a business under financial strain. The other has five years left to a strong, profitable company. The first looks safer. But if that tenant fails in year two you have an empty building and a re-letting problem, while the second is likely to reach its expiry and may well renew.
Length is only worth what the covenant behind it is worth.
What else shapes the real income
Break clauses. A ten-year lease with a tenant-only break at year five is a five-year lease with an option. Price it that way.
Repairing obligations. Full repairing and insuring terms put those costs on the tenant. Anything less puts them on you.
Rent review provisions. Their timing and basis decide whether the income keeps pace.
Re-lettability. Above all, would this building re-let if the tenant left tomorrow? A strong covenant in a poor location is a temporary reprieve. A moderate covenant in an excellent location is a manageable problem. Much of our own buying in York has been guided by that second sentence.
Diversification
A single building with a single tenant is an all-or-nothing outcome; either they pay or they do not. Spreading capital across several tenants, sectors and locations does not improve any individual covenant, but it changes what one failure does to your income.
For most individual investors that means either substantial capital, or a structure that provides the spread.